It is said that gold miners are in a ‘sunset industry’, fighting for their very survival. Is there any hope left? I would reason that it is possibly ‘darkest before dawn’ and that there is light.
The definition of a ‘sunset industry’ is “An older industry that continues to be important to an economy but is losing favour with investors due to its steadily falling employment generation capacity and profits, and comparatively higher environmental costs.” This describes the gold mining industry perfectly.
My previous articles have focused on physical gold and its role in our economy. I have strongly advocated that the best way to protect oneself against the ravages of inflation and potential stock market loss through a correction is to hold some physical gold as your ‘insurance’.
Furthermore, I indicated that between 5 and 10% of one’s portfolio should be invested in gold, of which the majority should be in Krugerrands, and that only the assertive investor should place a small portion of their assets in gold shares (the gold mines, with their gold resources still in the ground).
Let’s then attempt to go underground and see how we can find out more about the gold mining industry. In particular, the gold that still needs to be discovered (exploration) and proven by geologists, through to the building of a mine and determining how best to access the ore body and deliver it for pouring.
Reasons not to invest in SA’s gold mining companies
* The sector has a notorious track record of underperforming the rest of the stock market.
* The future of South African mines has been unclear up to now due to the delayed revision of the much-needed Mining Charter.
* The new Mining Charter published in September requires that for the awarding of a mining licence, 30% of the mine needs to be owned by BEE candidates (‘previously disadvantaged people’). It was previously 26%. However, when approached for clarity on the issue of ‘once empowered, always empowered’ in the event that BEE owners sell their shares, the High Court ruled that there must always be “a recognition of previous transactions”.
* Labour strikes hold miners to ransom as unions demand higher wages and benefits.
* In the event of a mining accident, government shuts down the mine until a full investigation has been done. These delays lead to further financial loses.
The positive attributes of investing in gold mines
* In the 1970s gold mining accounted for 25% of South Africa’s GDP, its profits making a meaningful contribution to the coffers of the country, benefiting all concerned.
* Gold miners have traditionally been a big employer, helping to alleviate the unemployment problem.
* South Africa is known to have the best gold resources in the world. Unfortunately these resources are very deep in the ground and it is not feasible to mine for this gold at the current low prices.
* Should the gold price rise significantly, South Africa will be well positioned to benefit from this opportunity.
* There is a leveraging effect when the gold price increases: the basic mining costs remain the same, but as the gold price increases, so the profit margin escalates, possibly significantly, which can translate into a far higher share price.
What does the industry say about itself?
Roger Baxter, CEO of the Minerals Council (formerly the Chamber of Mines), represented South Africa at the Africa Down Under conference held at the end of August in Perth, Australia.
Baxter stated: “South Africa’s mining potential is huge. Even in the absence of a greenfields exploration boom in South Africa, mining investment could almost double in the next four years if the country was to return to the top 25% of the most attractive mining investment destinations worldwide.”
He aded: “This would result in another 200 000 jobs being created in the economy with 50 000 direct jobs created in mining alone … the mining industry would be in a better position to increase its contribution towards infrastructure development and social projects in mining-affected communities. Given the industry’s commitment to real transformation, this would also materially advance the entire country’s transformation agenda.”
From his slide presentation it is evident that the gold mining sector will benefit the most. It would add 29 000 jobs directly, more than double that of the next best, the coal sector, and its capital expenditure investment requirement is 40% less.
Why is the Minerals Council so upbeat?
The Minerals Council has constructively engaged with all stakeholders. It sees the strategy that will enable the South African mining industry to realise its potential.
Baxter outlined the key requirements:
- A shared vision of the future of the mining industry
- Ethical leadership and good governance
- Policy and regulatory certainty and competitiveness
- Infrastructure that is available, efficient, cost-competitive and reliable
- Improved productivity and competitiveness, and
- The creation of a ‘greenfields’ exploration boom.
The grounds for hope at country level?
Baxter points out that since Cyril Ramaphosa was sworn in as president of South Africa in February, there have been a number of reforms and changes aimed at addressing state capture, rooting out corruption and getting the economy back on track.
Ramaphosa has also made some key cabinet appointments, including the respected Gwede Mantashe as the minister of mineral resources, and the trusted Pravin Gordhan and Tito Mboweni as ministers of economics and finance respectively.
Thorns among the green shoots
Ramaphosa has yet to spell out his proposed land expropriation without compensation policy, an issue that is in great need of clarity.
The revised Mining Charter has, however, provided clarity on the way forward for this sector. The revisions are generally positive and will advance transformation of the industry while also facilitating growth and development.
Overall, the tide appears to be turning. The industry has addressed many of the concerns that have held back investment and growth. Could it be that now is the time to be investing in the sector, when evaluations are excellent and, relative to other assets such as stocks and the bond market, gold miners are offering superb value?
This appears to be one of the best buying opportunities in many years.
In Part 2 I will examine who the gold miners are and which are the best to buy.
David Melvill is an independent investment advisor based in Montagu in the Western Cape.